The anticipation of Housing Development Finance Corp , India's largest mortgage lender, executing an interest-rate hedge once it completes its mega bond sale this week, is driving longer-duration bond yields lower, traders said on Wednesday.
And when the banks execute these swaps, there will likely be bunched-up demand for these bonds, which will pressure yields, traders said.
"The anticipation of HDFC's trade started playing out since late yesterday," said the banker quoted above. "Plus, the non-reaction to the U.S. data has led to short covering." The 10-year benchmark 7.26% 2032 bond yield was at 7.35%, after hitting 7.40% on Tuesday. This is despite the U.S. inflation data cementing the likelihood of at least two more 25-basis-point rate hikes by the Federal Reserve.Moreover, market participants said HDFC has been buying a larger-than-normal quantity of government bonds ahead of its merger with lender HDFC Bank, which will be likely completed next financial year.
That, said traders, is because the merged entity may have a higher statutory liquidity ratio – the minimum percentage of deposits commercial banks are required to invest in liquid assets, such as government bonds. "There could be demand from HDFC on two fronts – one would be the purchase of securities to maintain Statutory Liquidity Ratio and Liquidity Coverage Ratio needs after the merger with HDFC Bank," said Venkatakrishnan Srinivasan, founder and managing partner of debt advisory firm Rockfort Fincap.Reporting by Nimesh Vora and Dharamraj Dhutia; Editing by Savio D'Souza
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